We have in the Guardian of Au­gust 18 and 20:

Mak­ing the dis­count rate of Cli­co bond more at­trac­tive has been the stick­ing point Win­ston Dook­er­an said. In the 2011 bud­get, he pro­posed an an­nu­al ze­ro-rat­ed bond over 20 years for the first five years, (they) will get 90 cents to a dol­lar. But for the next 15 years, the dis­count rate ranges from 67 to 80 cents.

But it's this rate, he ex­plained, which he's work­ing on try­ing to im­prove so pol­i­cy­hold­ers can cash in their 20 bonds for a lump sum pay­ment. He be­lieves that there must be a hair­cut.

How­ev­er, a fi­nal rate has to be de­ter­mined by com­mer­cial banks be­fore the Gov­ern­ment will say how much it will have to top up. The Gov­ern­ment is hop­ing to give pol­i­cy­hold­ers 90 cents to the dol­lar for all 20 bonds. Where Cli­co owes $1 to­day, he gives five cents a year for 20 years. Thus, for ex­am­ple, if your EF­PA cash val­ue is $1 mil­lion, he is giv­ing you in ex­change an IOU for $50,000 a year for the next 20 years. Yet, a year lat­er he can't find a buy­er for IOU. He rais­es hopes and de­rail pol­i­cy­hold­er ac­tion and he knows they're hurt­ing, and ex­haust­ed they'll jump at 90 cents. A clas­sic bait and switch.

Time val­ue of mon­ey

Any­one who has saved or bor­rowed mon­ey knows that with an IOU there must be a dis­count. Five cents a year for 20 years to­tals $1, but it is worth a lot less than $1 to­day:

An in­vestor look­ing for 12 per cent over 20 years would pay 37 cents.

An in­vestor look­ing for 8 per cent over 20 years would pay 49 cents.

An in­vestor look­ing for 3 per cent over 20 years would pay 74 cents.

An in­vestor look­ing for 1 per cent over 20 years would pay 90 cents.

Dook­er­an would be lucky to find one to pay 45 cents.

The bot­tom line: 90 cents or any­thing close to 90 cents won't hap­pen. Pol­i­cy­hold­ers have a choice: suck up IOU or to­geth­er sue for 100 cents cash.

Risks of the IOU

IOU is a dan­ger­ous in­stru­ment for un­sus­pect­ing pol­i­cy­hold­ers as that they can­not hedge its in­her­ent risks (ie, naked po­si­tion). Of course, (Fi­nance Min­is­ter Win­ston) Dook­er­an does not alert them to the risks of his dis­grace­ful IOU. They get what Dook­er­an gives. They can hold it for 20 years and col­lect once a year, or if they be­lieve as he says, they can sell it for cash, but he's not sure ex­act­ly when or for how much. If they hold it they must bear its risks with­out any com­pen­sa­tion. Al­ter­na­tive­ly, if they sell, the in­vestor will de­mand com­pen­sa­tion as a high­er dis­count for bear­ing its risks and, of course, the cost for that "hair­cut" comes out of the hide of "naked" pol­i­cy­hold­ers. Will a lu­cra­tive cot­tage in­dus­try of bot­tom-feed­ing char­la­tans spring up, buy­ing up dis­count IOUs by feast­ing on the un­so­phis­ti­cat­ed, weak and des­per­ate? Every­body but Dook­er­an can see that the IOU is a brain-dead idea.

List­ed be­low are the risks of the IOU.

1. Fu­ture in­ter­est rates: The val­ue of the IOU on any giv­en day de­pends up­on the mar­ket in­ter­est rates on that day. The val­ue will move from day to day as in­ter­est rates change. The val­ue is very sen­si­tive to in­ter­est rates.

Fu­ture in­ter­est rates are un­known, and no­body knows when it will be is­sued, or if and when a buy­er will ap­pear. What will in­ter­est rates be at that time?

Ris­ing in­ter­est deep­ens the dis­count as the in­vestor would pay less for a se­ries of fixed dol­lar pay­ments. Sim­i­lar to bonds, val­ue drops as in­ter­est ris­es.

In fact, 1.0 per cent in­crease in in­ter­est rates caus­es the IOU to lose 8.0 per cent of its val­ue. Thus, if the in­vestor was pre­pared to pay 45 cents to­day, and, if by the time Dook­er­an ac­tu­al­ly got around to it, in­ter­est rates rose about 1.0 per cent, the in­vestor would pay clos­er to 40 cents.

2. In­fla­tion: IOU ex­pos­es "naked" pol­i­cy­hold­ers to the rav­ages of in­fla­tion, erod­ing buy­ing pow­er of the fixed dol­lar IOU pay­ments as they watch the price of every­thing around them rise. They buy less and less each year with a dol­lar.

At the time he pro­posed it, $100 payable in ten years would then buy about what $29 would buy to­day, and sim­i­lar­ly, $100 in 20 years had re­al pur­chas­ing pow­er of $8 to­day. The en­tire IOU had on­ly 35 cents on the dol­lar of pur­chas­ing pow­er. That's a 65 cent "hair­cut" be­fore in­ter­est. Who would spring such a dis­grace­ful idea?

In­fla­tion is cur­rent­ly about 9.0 per cent and ex­ert­ing pres­sure for in­creas­ing in­ter­est rates.

3. De­fault risk: IOU ex­pos­es pol­i­cy­hold­ers to risk that the Gov­ern­ment would de­fault on its oblig­a­tion to pay. An in­vestor would de­mand a much high­er yield for that risk (ie, junk bond). Twen­ty years is a long time and things and peo­ple change.

Re­mem­ber the pre­vi­ous Fi­nance Min­is­ter?

"The bailout as it has been called was a guar­an­tee!" And so it was, no "hair­cut" for them, they each got 100 cents on CIB de­posits and all the oth­er lucky ones; ex­cept Cli­co, of course.

Dook­er­an nev­er re­al­ly ex­plained the dif­fer­ence be­tween a de­posit and a short-term in­vest­ment or why he so strong­ly be­lieves that there must be a hair­cut for the lat­ter, but not even a trim for the for­mer.

Re­mem­ber, it was CIB that had the liq­uid­i­ty is­sue and the Cen­tral Bank Gov­er­nor Ewart Williams shut it down on the spot while Cli­co was car­ry­ing on pay­ing claims.

EF­PA sub­sidised the CIB de­pos­i­tors with the mem­o­ran­dum of un­der­stand­ing forc­ing Cli­co to for­feit its own CIB de­posits, but wouldn't it make more sense the oth­er way around?

Dook­er­an deemed EF­PA a de­posit, as what else could he deem it?

He al­ways calls it "de­posit" and them "de­pos­i­tors" (See be­low).

CIB had the up­scale, so­phis­ti­cat­ed clien­tal and paid high­er in­ter­est rates than Cli­co as it had no com­mis­sion ex­pense. And yet he holds EF­PA hostage, even though the court has ruled twice that the whole thing was un­law­ful.

What dri­ves him?

The Gov­er­nor con­fus­es "de­pos­i­tors" and "pol­i­cy­hold­ers" all the time.

He said: "The law re­quires the statu­to­ry fund to be di­rect­ed, in the first in­stance, to do­mes­tic de­pos­i­tors."

But that law, the In­sur­ance Act of T&T, does not con­tain the word "de­pos­i­tor."

Cli­co is not au­tho­rised for de­posit busi­ness and, thus, can­not have de­pos­i­tors.

Claude Mu­saib-Ali-the fa­ther of the EF­PA-saw it that way as he was un­der con­trol of CBTT and claimed: "All pol­i­cy­hold­ers' funds are guar­an­teed by GORTT."

CBTT pals and elites didn't take a "hair­cut. That, too, was pre-Dook­er­an. Who can you trust?

Dook­er­an says: "They were all jok­ers and it was a bunch of lies, but you can ab­solute­ly trust me here: All de­pos­i­tors' IOU de­posits are guar­an­teed by GORTT (See be­low)."

Would you trust Dook­er­an to pay on the IOU?

Ex­pens­es:

As com­pared to pay­ing EF­PA, there will be new ex­pens­es of ad­min­is­tra­tion of 14,000 IOUs for 20 years. Imag­ine peo­ple, premis­es, sys­tems, cor­re­spon­dence, keep­ing records cur­rent of names (mar­riage, di­vorce, and death), ad­dress­es, banks, and ac­count­ing, IOU val­u­a­tion, re­port­ing, au­dit, etc. Runs $5 mil­lion a year and $100 mil­lion to­tal. Who pays? EF­PA pays. Wouldn't it be bet­ter to give it to the suf­fer­ing peo­ple?

Liq­uid­i­ty: Dook­er­an demon­strat­ed af­ter a year of try­ing that IOU can't be con­vert­ed to cash quick­ly and not at its full val­ue. That deep­ens the dis­count an in­vestor would de­mand. What if in­vestor's cir­cum­stances lat­er changed and he want­ed to sell it? Would there be a mar­ket, say, five years down the line?

Ac­crued in­ter­est: It is re­port­ed that Dook­er­an con­fis­cates ac­crued in­ter­est. He stopped cred­it­ing in­ter­est, but he hangs on to your mon­ey as it makes more mon­ey for him. Thus, IOU it­self may be based on 80 to 90 cents be­fore any dis­count. Isn't that re­pul­sive? He's got a hid­den dis­count.

Will in­vestor in­cur ex­pens­es ac­quir­ing IOU such as: quot­ing val­ues, ad­ver­tis­ing and com­mis­sions? If so, there will be an­oth­er "hair­cut" for pol­i­cy­hold­ers in­clud­ed in the dis­count.

Be­low are a few ex­am­ples.

An in­vestor with long-term oblig­a­tions may con­sid­er the IOU as a rea­son­able hedge for his pur­pos­es and, af­ter weigh­ing all risk fac­tors in­clud­ing de­fault and liq­uid­i­ty, may pay 35 cents for the cash­flows that he is buy­ing.

An in­vestor buy­ing on­ly five years of pay­ments may be more ag­gres­sive com­pared to the un­cer­tain­ties of 20. An in­vestor would pay 90 cents on the dol­lar for the first five pay­ments if he was sat­is­fied with a 4.0 per cent re­turn. But is 4.0 per cent for five years some­thing to get ex­cit­ed about when in­fla­tion is 9.0 per cent?

Peo­ple should not be leav­ing their mon­ey in the banks, they should be spend­ing it. Where will the bank mon­ey come from to buy the IOU?

So even if we find such an in­vestor, where does that leave the pol­i­cy­hold­er?

He still owns the tail of the IOU that starts in year six and runs out to year 20. The tail will be blow­ing in the wind with chang­ing in­ter­est rates and in­fla­tion, as well as gov­ern­ment fi­nances and de­fault.

A 1.0 per cent rise in in­ter­est in the en­su­ing five years and the tail drops over 11 per cent.

A 9.0 per cent in­fla­tion con­tin­u­ing over the five-year pe­ri­od knocks 35 per cent off its val­ue.

On the pos­si­bil­i­ty of per­sons opt­ing to go to the courts to force Gov­ern­ment to pay their full de­posit, Dook­er­an said the nat­ur­al out­come of a court de­ci­sion would be the liq­ui­da­tion of the com­pa­ny and there was no guar­an­tee that de­pos­i­tors would get back any­thing of sig­nif­i­cance un­der this arrange­ment.

"That would be work­ing against the in­ter­est of every­one," he said. Don't wait for an in­vestor to mag­i­cal­ly ap­pear. You should not ac­cept IOU in the first place and you should join the pol­i­cy­hold­er ac­tion. But, if you are hurt­ing, do not make a de­ci­sion based on a dis­count of­fer such as 90 cents. You are en­ti­tled to have Cli­co pro­vide the cash val­ue of your pol­i­cy on the day that you sur­ren­der it for cash. An in­de­pen­dent au­dit of Cli­co's cash val­ue de­ter­mi­na­tion process must be un­der­tak­en and cer­ti­fied con­trac­tu­al­ly cor­rect.

Don't trust any of them with your mon­ey.

Gene Dzi­adyk

Fel­low So­ci­ety of Ac­tu­ar­ies

Fel­low Cana­di­an In­sti­tute of Ac­tu­ar­ies